On 2 February, Bank of Valletta plc issued its Interim Directors’ Statement explaining that the Bank has experienced a particularly difficult start to the current financial year which commenced on 1 October 2008 mainly due to the continued nervousness and volatility in the international financial markets. Furthermore the markets have continued to re-price risk whilst maintaining a lookout for the likely impact of the impending recession on the wider economy. Substantial sell-offs by financial institutions and hedge funds have further increased pressure on equity and bond prices. Also, heightened risk aversion has caused dysfunctional market behaviour and a marked absence of liquidity. However, the Directors expect that the radical actions being undertaken by governments around the world should secure the global financial system.
All this has adversely impacted BOV’s financial markets portfolio which incurred further unrealised fair value mark-downs during the four months up to 31 January 2009. These unrealised markdowns have been partly mitigated by increases in the value of financial instruments held for sale. However the International Accounting Standard (IAS) 39 does not permit such gains to be booked through the Income Statement and must be accounted for in the Balance Sheet.
BOV’s financial markets portfolio continues to be well diversified mainly made up of highly rated sovereign, corporate and financial sector debt securities with moderate duration. Moreover the Directors remain of the view that most, but not all, of the unrealised mark-downs will be clawed back over time since the majority of holdings are kept until maturity. The majority of holdings present in the Bank’s portfolio have continued to pay interest and meet redemption obligations on due date.
The unprecedented reduction in the European Central Bank’s intervention rate by 225 basis points to 2% between 1 October 2008 and January 2009 had an adverse effect on the Bank’s profitability. BOV, which has passed much of this reduction to its customers, is suffering from the lag time effect of re-pricing term deposits and from compression of the net interest rate margin resulting from ongoing competition. Nonetheless BOV experienced satisfactory growth in customer deposits during the first four months of the current financial year ending September 2009.
The Directors also stated that the Bank has not evidenced any deterioration in the credit quality of its loan portfolio but experienced a slowdown in demand for credit especially on the home loans side. Despite an improvement since the turn of the year, demand for investment and insurance products has remained subdued. On a positive note, commission income on other banking services has shown a satisfactory increase over the corresponding period last year. Moreover the Bank has managed to maintain costs around the 2008 financial year level.
On the Balance Sheet side, BOV continues to adopt a conservative policy together with liquidity and capital ratios maintained at levels well in excess of prudential regulatory requirements. Moreover the Bank still intends to boost its Tier II capital level through a subordinated loan issue during 2009. This new bond will serve to replace the current subordinated capital of BOV, which matures in 2010, and in anticipation of future international regulatory encouragement for higher capital ratios.
The Directors concluded that due to the current levels of volatility in international markets and the unfolding global economic recession, the current financial year will be a very challenging one for BOV.